fear gauge - All posts tagged fear gauge

With 130 million Americans expected to hit the polls in Election 2016, Wall Street’s so-called fear gauge is falling for a second straight day. The CBOE Volatility Index (VIX) fell more than 4% to 17.92 in recent market action on the heels of a massive drop yesterday that brought an end to a nine-day rally during which the index doubled, climbing above 22.

Wall Street’s fear gauge is rising for a seventh straight day, climbing more than 5% to hit its highest level since late June. The CBOE Volatility Index (VIX) rose 5.6% to 19.59, continuing a streak that began Oct. 24. Since then, the VIX has climbed almost 50%, a bad tiding for the flood of investors who made big bets in recent months against volatility.

Is the CBOE Volatility Index (VIX) really predictive? If it is, it’s getting spooky out there for investors who made big bets against volatility.

The CBOE Volatility Index, known as the market’s fear gauge, rose 5% today to 16.99 , extending the gains posted Friday after the FBI announced that it was reviewing new evidence in the investigation of Hillary Clinton’s emails. In fact, Credit Suisse’s Mandy Xu writes that implied volatility rose across various asset classes last week

Among the anomalous happenings that occurred on Aug. 24 — the steepest decline for stocks in four years — was a conspicuous outage in the CBOE Volatility Index (VIX) during the first 30 minutes of trading.

Maneesh Deshpande, a derivatives strategist at Barclays, on Tuesday took a crack at explaining what happened to the VIX on the morning of Aug. 24. His conclusion? A relatively new method for calculating the market’s fear gauge gummed up the works. The VIX uses options prices to give readings on how much S&P 500 volatility the market expects for the next 30 days. The VIX last year began incorporating weekly options into its calculations.

Here’s Deshpande (derivatives jargon alert):

“While the VIX, the volatility ‘cash’ index could not be calculated, it’s derivatives were alive and kicking.

Thus VIX futures were trading quite actively during this first half hour and in fact, during this time period the front VIX futures traded nearly ~40K contracts, which was nearly 0.4 times their full day average trading volume of 100K contracts.

In addition VVIX (the VIX analog for VIX options) was being calculated quite smoothly during this period. In other words, while investors did not know the level of spot volatility, they did know its expected level in one month and the level of spot volatility of volatility!”

Here’s what Barclays thinks happened:

“In our opinion, the problems with the VIX calculation were technical and related to the recent change in VIX methodology… Historically, the CBOE used the two nearest regular option expirations (third Friday of each month) to calculate the variance swap levels which were then interpolated to calculate a 30 day variance swap level.

However, the VIX methodology was recently modified to use the weekly (non-standard expirations) SPX options. The main rationale was that this provides a more accurate estimate of the 30 day variance swap since we are using two points that are a week apart, which should minimize interpolation errors. The increasing liquidity in the weekly options appeared to justify using them in the VIX calculation.”

In a nutshell:

“Problems with VIX calculation appear to be linked to the liquidity evaporating in the non-standard options (weekly expirations), which are now used to calculate the VIX index.

Updating the quotes on all these contracts was likely quite challenging during the fast moving markets.

Although the new VIX index is certainly a more accurate representation for 30 day volatility, we recommend investors use the old VIX as a more reliable indicator during future episodes of stressed markets.”

Is the volatility spike over or just the beginning? That’s a good question with the CBOE Volatility Index (VIX) hitting a new two year high.

At 26.95, the Wall Street’s fear gauge surged more than 20% to 27.47 in early afternoon market action after earlier climbing above 28. The VIX hasn’t traded this high since 2012.

Volatility has surged since July, when the index hit a 52-week low of 10.2. The VIX is inversely correlated with the S&P 500 and many view it as an indicator of market peaks.

The main stock markets in the U.S., UK, Japan and Europe have been roiled recently by worries about global growth, interest rates, dangerously low inflation in Europe and ripples from a steep drop in oil prices. Today, the Dow dropped more-than-200-points.

But some pundits argue that investors need to put the Vix’s performance in context. According to Daniel P. Wiener, CEO of Adviser Investments, a Newton, MA-based money management firm, the index “bounces around like a ping pong ball on illicit pharmaceuticals.”

Meanwhile, the index has averaged 13.77 for all of 2014, which is well below the index’s long-term mean of 20.

Wiener later added:

…we have been experiencing one of the most risk-less, calm, easy-going markets in years. It won’t always be this way, and if the rest of 2014 brings us up to even average we’ve got a bunch of volatile days to come. Deal with it!

The trading in the market’s usual risk sectors certainly suggests investors are worried. The small cap Russell 2000 is down by -.7% to 1.054,31. The iShares MSCI Emerging Markets ETF (EEM) is down 2% while the Direxion Daily Emerging Markets Bear 3X ETF (EDZ) is leaping almost 5.9%.

Volatility-trading vehicles are flying off the shelves, not that they’re easy to catch when they do that. VelocityShares Daily 2x VIX Short-Term ETN (TVIX), the ProShares Ultra VIX Short- Term Futures (UVXY) and Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) are gaining by anywhere from 7.7% to 15.5%.

Fear is rising. The CBOE Volatility Index (VIX) continued its upward climb today, rising 9% to 20.45 after earlier rising above 22 on the heels of eye-popping gains yesterday.

UBS Strategist Julian Emanuel argues that volatility could keep rising. In a note published today, he wrote:

When considering the numerous geopolitical hot spots, public health concerns, the end of the Fed’s QE due on 10/29 and the unknown of elections in Brazil and Ukraine (10/26) and the US Midterm election on 11/4, we expect volatility to remain elevated, gravitating toward the long term mean of 20, with the potential to spike higher should 2014′s growth scare more closely resemble 2011′s (S&P 500 decline of 17.9%) rather than 2013′s (S&P 500 decline of 5.8%). Putting it into context, a VIX of 20 implies an average daily move in the S&P 500 of around 24 points and in the Dow Jones Industrial Average, 210 points. Expect more volatility!

The VIX, known as Wall Street’s fear gauge, has been rising since mid-June, when it fell below the 11 mark, the lowest levels since 2007. The index is inversely correlated with the S&P 500 and many view it as an indicator of market peaks.

Today’s intraday high of 22.06 is also a 52-week high for the index.

The bulls and bears are battling valiantly. Yesterday, the grizzlies won, with the Dow suffering a more than 300-point drop and continuing to fall today.

There’s a triple-digit loss on the Dow Jones Industrial Average (DIA) Wednesday and half a percentage point gone from the Nasdaq Composite and Standard & Poor’s 500 stock index (SPY). But check out the volatility index.

The CBOE Volatility Index, often dubbed the “fear gauge,” usually rises when stocks fall. Not this afternoon, though. The VIX is down about half a percentage point, currently hovering above 16. The related Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX), an exchange-traded note tracking volatility futures, is down about 1% this afternoon. The leveraged ProShares Ultra VIX Short-Term Futures ETF (UVXY) is down 2%.

The VIX usually rises when stocks fall because wary investors pay up for options to buy and sell the S&P 500. It’s the price of those options that drives the calculation of the VIX. The volatility index was rising this morning, but not anymore.

It’s entirely consistent with investors’ “In Fed We Trust” instincts the last few months, which tell them that no selloff is worth worrying about.

About Focus on Funds

With exchange-traded funds ballooning in popularity, it’s harder to and more important to separate fact from fiction. On the Focus on Funds blog and ETF Focus column, L.A. native Crystal Kim lifts the hood on ETFs, mutual funds and hedge funds to highlight overlooked values, actionable ideas and potential pitfalls.